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Perhaps you are giving your portfolio a “spring cleaning” and are trying to decide just how much “risk” potential there is in your investments. But just how do you undertake this task -- this is where terms like alpha and beta are being put forth as measures of risk. But just what do these terms mean? Read on for some of the basics.

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Alpha

This measures stock price volatility based on the specific characteristics of the particular security. It will take the volatility of a stock and compare its risk adjusted performance to the performance of its benchmark. Any excess return of the stock relative to the benchmark is the stock’s alpha. The higher the number indicates a higher excess return. An alpha of 1.0 means the fund outperformed the market by 1 percent over a similar investment with the same risk.

Beta

Beta calculates how much or little an investment’s price varies relative to a specific benchmark. The benchmark is assigned a risk rating of 1.0. If your stock has a beta of 1.1, for example, it has been 10 percent more volatile than the benchmark. If the market has a return of 10 percent an investment with a beta of 1.1 would be expected to earn a return of 11 percent. It the benchmark drops 10 percent the investment would be expected to drop by 11 percent. A beta of less than 1.0 would have less price variance than the benchmark.

Standard deviation

This measure how much an investment’s return fluctuates from its own longer-term average. Higher standard deviation usually indicates greater volatility -- but not necessarily a greater risk of loss. Standard deviation is quantifying the variance of returns -- there is no differentiation between gains and losses. Consistency of returns matters. An investment with a 1 percent loss every month for a certain time frame would earn a standard deviation of zero. An investment that earned 7 percent one month and 10 percent the next would have a much higher standard deviation -- however, it would appear to be the favorable investments. Greater volatility is one measure and not necessarily a bad one.

The standard deviation of an investment's expected return is considered a basic measure of risk. If two potential investments had the same expected return, the one with the lower standard deviation would be considered to have less potential risk.

Sharpe ratio

This is a more complex calculation that measures risk adjusted return. This calculation measures the incremental reward of assuming incremental risk. The larger the Sharpe ratio, the greater the potential return.

Having an awareness of these ratios can help you understand the role of risk in your portfolio. Keep in mind that no amount of knowledge can eliminate risk entirely. It is just one tool to help you manage your investments.